Should your health care system invest in an ambulatory surgery center? A decision-making framework

Ambulatory surgery centers (ASCs) offer the opportunity for surgeons to perform specific procedures more efficiently and conveniently than they can in hospital-based operating rooms (ORs). Consequently, health care systems are increasingly interested in ASCs as a strategic option for delivering surgical services. Although the long-term value proposition of a more efficient cost structure might appear compelling to individual health care systems, the decision to add an ASC must be made wisely based on local circumstances.

This article is intended for surgeon leaders and hospital executives who are considering building or buying an ASC, and provides a framework for assessing such an ASC investment opportunity. The authors examine why a health care system should consider investing in an ASC and when to avoid such an investment. This article describes fundamental investment options and offers a practical guide for establishing the viability of a health care system’s ASC opportunities. As with any major health care investment, numerous financial, legal, and regulatory intricacies are involved in fully realizing an ASC from start to finish. This article will help health care system leaders, particularly surgeons, perform the initial assessment necessary to guide ASC investment decision making.

Trends in ambulatory surgery

An ASC is a freestanding facility that “operates exclusively for the purpose of providing surgical services to patients not requiring hospitalization, and in which the expected duration of services would not exceed 24 hours following an admission.”1 Conversely, hospital ORs provide surgical services to both inpatients and outpatients who may require hospitalization and for whom the duration of services may exceed 24 hours. Nearly half of all operations performed in U.S. hospitals and ASCs are provided on an ambulatory basis.2,3

Surgical techniques, payment models, and regulations have evolved as this ambulatory surgery model has become more established.4-6 Reimbursement rates for facility fees reflect hospitals’ higher overhead costs, and are typically higher—up to 40–70 percent higher—for hospital-based surgery than for procedures performed in ASCs.7 Recent estimates suggest that more than half of all outpatient procedures occur in hospital ORs, but up to 40 percent of these operations could safely be shifted to ASCs.8 ASC market share trends for four common procedures in the Medicare population are outlined in Figure 1. The long-term value proposition for the overall health care system is compelling; such a shift from hospitals to ASCs could result in a $25 billion savings to Medicare over 10 years.9

At the local level, negotiating this shift is complicated and involves understanding the often competing priorities of health care systems, ASCs, surgeons, and patients. Independent ASCs and larger health care systems are frequently in direct competition for surgical cases.9 Surgeons and patients can both exert influence over whether an equivalent procedure will be performed in a hospital or an ASC, but little research is available to identify consistent preferences among either group. Convenience, habit, and familiarity likely play as strong a role as any other factor. Financially, surgeon-investors with an interest in an ASC are strongly incentivized to drive cases to their facility.4,10,11 Hospitals and health care systems cannot legally offer this financial incentive to non-investor surgeons.12,13

Given their competing objectives, health care systems and ASCs have had an affiliation characterized much more by competition and contentiousness than by cooperation.10,11,14 This relationship has been changing, however, as health care systems increasingly turn to the ASC model.15,16 Investment options for health care systems include building a new ASC or acquiring an existing one.17 Additionally, health care systems can choose to invest as a solo venture or in partnership with outside investors, typically a physician group. The U.S. has more than 5,000 ASCs, and more than 90 percent are at least partially owned by physicians or physician groups.18,19 As of 2007, only a small minority was partially (16 percent) or fully (3 percent) owned by hospitals, but by 2015, some estimates had the total at 20–25 percent.17,19

The settings in which future surgical care is provided will continue to evolve, and both hospitals and ASCs will be part of that evolution. The role of surgeons in this process is yet to be defined, but they are often at least partial investors in new ASCs. Non-investor surgeons may find they are being expected to perform more outpatient cases in a nonhospital OR.

Reasons to invest in an ASC

A health care system might consider investing in an ASC for various reasons, including those described in the following paragraphs. (For a brief overview of the advantages and disadvantages of investing, see Table 1.)

Improved cost structure

A growing body of published evidence shows that low-risk surgical procedures can be performed more efficiently in ASCs than in hospitals.7,8,20 Because ASCs are designed to deliver a narrow range of outpatient surgical services, they can be more efficient than hospitals in several significant ways, such as room turnover and facility overhead costs, and have greater flexibility in terms of staffing.21 Because surgeons at ASCs often perform the same types of cases repeatedly, ASCs only need to purchase a subset of the equipment and supplies. If these repetitive cases are frequently performed in hospital-based ORs, a health care system may have a significant opportunity to improve their cost structure by shifting those cases to an ASC.17

Increased market share

When procedures that once took place in a hospital are performed in an independently owned ASC, those cases represent a loss of market share for the health care system, and the resulting revenue impact on the hospital can be substantial.10,11,14 Therefore, when a health care system invests in an ASC, it can gain back that lost market share or head off potential threats from future independent ASC competition.22

Increased patient convenience/satisfaction

Aside from lower operating costs, an improved patient experience is often offered as a reason to shift cases from the hospital to an ASC. Improved patient satisfaction can be attributed to variables such as greater accessibility, more convenient parking, and quieter and less-confusing facilities. Compared with visiting a large hospital full of acutely ill patients, an ASC may project a more relaxed environment. The appeal of this image is self-evident; interestingly, however, little published research is available to confirm that patients do prefer the ASC setting.20,23

Improved access to meet community needs

Health care systems are increasingly coming to view local or regional population health as part of their core mission.24,25 For hospitals and health care systems that comprise the health care safety net, meaning those with a high proportion of Medicaid and uninsured patients, the care of vulnerable populations is even more central to the organizational mission.26 From this standpoint, the efficiency gains that can be realized by an ASC relative to hospital-based care may allow a safety net health care system with constrained resources to better serve community needs. Traditional models have largely failed to eliminate disparities; albeit unproven, it is possible that the ASC model implemented in the safety net would improve access to surgical care for vulnerable populations.27-29 Revenue creation in this setting will be a steep challenge, which is the primary reason very few safety net ASCs exist today. Additionally, coordinating the multiple functions needed to efficiently execute ambulatory surgical care (for example, preoperative evaluation, transportation, pharmacy, follow-up visits) with vulnerable populations may be more challenging and require more investment relative to those with a high commercial payor mix. However, for a system focused on population health, increasing access to and efficiency of care for its population at the cost of a financial loss in one business unit may be a worthwhile tradeoff.

Reasons not to invest

There are numerous reasons not to invest in an ASC, including decreased revenue, upfront costs, case-volume requirements, and hesitancy to switch to ASC care on the part of patients and providers (see Table 1).

Decreased revenue

Because hospital-based ORs can charge higher facility fees than ASCs for equivalent procedures, if a health care system shifts those procedures out of the hospital and into an ASC, it will see an immediate drop in revenue. This differential reimbursement has an uncertain future, however. Some payors already refuse hospital-based facility charges for procedures that could be done in an ASC.30 In the long run, trends that incentivize cost reduction and value improvement are likely to become more, rather than less, common. For many health care systems, then, the question is not whether to buy or build an ASC, but when.

Of note, prior to January 1, hospitals could actually purchase an existing ASC and then convert it to “hospital-based” status, making it possible for hospitals to start charging higher facility fees despite lower overhead costs. This loophole, however, was eliminated with passage of the Bipartisan Budget Act of 2015.6,31 Although the specifics of future health care regulation are uncertain, health care systems that are able to deliver quality services in the most cost-effective, efficient, and patient-centered settings will be well-positioned to thrive.8

Upfront costs

Construction or purchase prices for ASCs are often in the single- to double-digit millions.32 Purchasing land, contracting with physician groups and ASC staff, and fulfilling licensing and regulatory requirements also consume significant amounts of money and time. A pro forma financial analysis can produce cost estimates for specific potential sites, plans, and opportunities. This step provides great clarity by grounding conceptual plans in reality. Not all health systems are financially strong enough to pursue an ASC opportunity; a joint venture may mitigate this cost to some degree.

Case volume requirement

Because ASCs have high fixed costs relative to marginal costs, the most important factor in achieving positive financial margins is revenue.33 While contracts, reimbursement rates, and payor mix can sometimes be renegotiated to increase revenue, the primary strategy that ASCs use to achieve optimal revenue is maximizing surgical case volume and throughput.9 Financial stability thus depends almost entirely on reaching a minimum annual case volume threshold, and achieving it can be a challenge.

Higher margin procedures, such as orthopaedics, will have a relatively lower threshold, and lower margin procedures, such as ophthalmology, a higher threshold. As a general rule, depending on the procedure and payor mix, this margin is typically somewhere between 2,000 and 4,000 cases annually for an average ASC with four ORs.9 If a health care system chooses to build a new ASC, increased volume has to come from a combination of its present hospital-based procedures and from new sources, such as additional surgeons or new referral networks. Hundreds of independent ASCs fail financially each year, and not achieving this volume threshold is often the critical factor.34 Additionally, when a health care system shifts procedures from a hospital to an ASC, this reduction in hospital-based procedures must be replaced to maintain financial margins.

Patient and surgeon choices

A health care system theoretically can shift all of its ASC-appropriate procedure volume out of hospital ORs; however, in practice, this move rarely occurs due to both patient and surgeon preferences. Typically, only 40–60 percent of ASC-appropriate procedures end up shifting to a new ASC.

As part of a recent study comparing the cost of care for identical procedures performed in different settings, patients were allowed to independently choose a hospital or ASC for outpatient orthopaedic surgery, based on availability and convenience. As a result, 63 percent of all procedures (854 of 1,365) wound up being performed in the hospital, meaning only a minority of patients opted for the ASC when given a choice.20 As noted previously, little research into patient preferences has been conducted, but it is safe to assume that not every patient will opt for an ASC if given the choice.

Likewise, surgeons may prefer to schedule procedures in the hospital, whether for convenience, habit, or a sense of security. Depending on the location, placing an ASC in a geographically separate site may significantly affect a surgeon’s daily or weekly workflow. If a new ASC is inconvenient for physicians, forcing them to schedule procedures at this facility will prove to be a leadership challenge. However, mutually satisfactory arrangements can often be achieved, such as locating an ASC near surgeons’ clinics or offices. Eliminating logistical barriers will improve the chances of successfully shifting procedures from the hospital to the ASC.

Additionally, surgeons who have practiced their entire career in a tertiary care setting may be uncomfortable operating without immediate higher-level backup, even if the likelihood of needing it is very low. Anesthesiologists, for example, have developed contingency plans for rare and catastrophic complications.35 Although many surgeons are early adopters of new innovations, even relatively minor changes in practice can be challenging to implement.36,37 Finally, the lower costs of an ASC may not be fully realized if surgeons practice in exactly the same way. In comparison with hospital ORs, ASCs have more efficient cost structures derived from streamlined supply purchasing, faster case length and turnover, and typically limited focus on resident education. Surgeons who come from a tertiary care environment and do not alter their practices and preferences to accommodate these factors may impair the ASC’s ability to realize an optimal cost structure.

Assessing investment options

In general, health care systems have two fundamental investment options—build or buy. The investment can be pursued as a solo venture, or as a partnership with an outside investor group, typically a group of physicians. Table 2 summarizes the advantages and disadvantages of each option.

Table 2. Advantages and disadvantages of different investment and partnership types

Investment type

Advantages

Disadvantages

Build new ASC

Choice of location

Choice of physicians

Choice of referral network

Choice of building design, layout, features

Certificate of need requirements may limit options

Process can be prolonged (from decision to opening typically at least 18 months for the smallest, simplest ASCs)

Must acquire land
Architecture, construction, licensing costs

Purchase
existing ASC

Faster than building

May avoid certain regulatory requirements and processes

May have a baseline level of referrals and cases that are independent of the health system

Facilities and locations are limited to the existing ASCs in the local market

Health system surgeons may have no incentive to shift practice to ASC setting

Joint venture

May reduce initial investment cost

Partially mitigates downside financial risk

If joint venture partners are physicians, they will be incentivized to shift case volume to the ASC

Health system brand can be valuable to partners, may help facilitate favorable agreements

Management decisions must be negotiated/settled with partners

Profits shared with partners

Options for partnership groups limited by market conditions

To navigate these complex influences in a practical way, the following framework can guide a health system in systematically considering the most salient issues in an ASC investment decision (see Table 3). The entire exercise may not need to be completed before a clear recommendation is apparent, but proceeding through the entire set of questions can be helpful in understanding a health system’s unique circumstances and limitations with respect to ASC investment.

Table 3. Decision-making framework: Should this health care system invest in an ambulatory surgery center?

*Break-even = Total investment cost/average contribution margin per case†Time frame to break even = Break-even case volume/expected cases per month‡ROI: Total revenue over fixed time period – total investment cost – total operating cost over fixed time period/ total investment cost – total operating cost over fixed time period

Examine ASC-appropriate case volume

First, determine the number of ambulatory procedures performed annually in the health system and examine trends over the past five years. Determine what fraction of those procedures are ASC-appropriate. Which ones could safely be performed in the ASC setting? Remembering that typically only 50 percent of these procedures are successfully shifted to an ASC, cut the total number of ASC-appropriate procedures in half to arrive at an initial estimate of internally generated case volume.

If the total is more than 4,000–5,000 cases, procedure volume is likely to be less of a concern. If the total is between 2,000 and 4,000 cases, achieving the threshold to maintain a positive financial margin will likely require adding new sources of volume to the system, either through additional physicians or referral networks. If the total is below 2,000, achieving the volume threshold may prove challenging. The precise threshold will depend on procedure and payor mix, however. In any case, a health system should have a high degree of confidence in these projections when moving forward with an investment decision.

Examine current reimbursement levels and trends

For these ASC-appropriate cases, calculate average reimbursement given the procedure and payor mix. It will be necessary to adjust current reimbursements by replacing hospital-based facility fees with lower, ASC-level facility fees. Examine trends from payors over the last five years and develop a sense of the volatility in reimbursement rates and likelihood of significant changes in the future.17 Generating these numbers will provide a realistic range of revenue expectations.

Assess barriers to shifting cases from hospitals to ASCs

Surveying the surgeons who will be practicing in the proposed ASC can be done relatively quickly and inexpensively, and is critically important. Making a large investment decision without knowing what the surgical staff expect can be very risky. Given the preferences of the health care system’s surgeons, how many ASC-appropriate procedures can be expected to actually shift to the ASC? Survey and interview questions should specifically identify any particular advantages or disadvantages unique to the health care system, assess opinions on any specific locations or facilities under consideration, and elicit as honestly as possible the surgeons’ interest in practicing in an ASC. The answers will help a health care system understand to what degree internal procedure volume can supply an ASC, and to what degree procedure volume will need to be augmented by new sources.

Local health care market factors, including total case volume at competing institutions and regulatory requirements, may present barriers to successfully realizing an ASC. For each institution in the local market, obtain estimates of annual case volume and breakdown by specialty and location (hospital versus ASC). Although many counties in the U.S. have ASCs, some have relatively few.22 Assessing the degree of market oversaturation will influence decision making.

After assessing the local health care market, obtain a basic understanding of state regulatory requirements. Certificate of need requirements exist in 34 states, which can limit ASC growth in saturated markets.38 However, loopholes and exceptions can often be found.39

Develop options for acquisition and partnership

The opportunities available for building or purchasing an ASC, as well as proceeding as a solo or joint venture, will depend on the circumstances of the local health care market. Each option should be explored and developed with realistic, specific alternatives enumerated. Generally speaking, if a health care system is in a relatively ASC-dense market, acquiring one or several ASCs will likely be a realistic option. Land acquisition costs will vary by market. Co-investment partners may be groups of local surgeons, or even national ASC firms.40 Keep in mind that if the health care system’s brand is strong locally (such as an academic medical center), it may have a competitive advantage in bidding for ASC acquisition targets.15

Obtain a financial projection

Formally develop upfront cost estimates for all of the options described in this article—specific alternatives for building versus buying and solo investment versus partnership. Generate estimates of operating costs, which can often be adapted from an existing local ASC cost structure.

Calculate contribution margin and break-even

Calculate the expected average revenue and expected average cost per procedure. Develop a range for these values depending on the number of procedures expected per year.

Next, calculate the average contribution margin, which is total projected revenue minus total projected cost, divided by total number of expected procedures. A positive contribution margin predicts whether the venture will be financially successful, and the higher the contribution margin, the greater the degree of financial safety. A negative contribution margin makes any investment opportunity financially inadvisable, unless it can reasonably be expected to turn positive in the future. Although health care systems are better able than independent ASCs to absorb significant financial shocks, independent ASCs are typically advised to maintain a contribution margin of 30 percent or more to guard against unexpected changes in procedure volume or reimbursement policy.

Dividing the upfront investment cost by contribution margin yields the investment break-even point; that is, the number of procedures that need to be performed to pay off the original investment. In general, if there is a high degree of confidence in projected future revenue and cost, a longer break-even period may be acceptable. When there is less certainty about future projections, a shorter break-even period is more desirable, as debts will be paid off more quickly.

Return on investment (ROI) can be calculated over a fixed period, which can be useful for boards and executive groups working within specific time horizons (such as a three-year plan). This is calculated as the total revenue minus total cost over a fixed period, divided by the total cost over that same period (including investment costs).

Synthesis

A health care system’s decision on whether to invest in an ASC will be based on the following factors: projecting expected case volume and revenue; assessing internal and external barriers; exploring realistic investment options; and calculating the average contribution margin, investment costs, and break-even period for these alternatives.

For some, achieving a threshold procedure volume may appear unrealistic, and for others, their ORs may be over capacity. Depending on procedure and payor mix, attaining a positive financial margin may be too uncertain. The surgeon workforce may be enthusiastic and willing to work around challenges to shift procedures to the ASC setting; alternatively, such a change may be so disruptive that physicians are unlikely to alter their practice patterns. Some health care systems may have multiple acquisition targets, and others may be limited to building on their own. Working through this framework systematically will help health care system leaders to understand whether investing in an ASC is a realistic and prudent strategic option, and if so, why. Areas of low precision or confidence can be identified for further investigation.

Given the overall trend of shifting surgical care to lower acuity settings, if a health care system’s initial assessment recommends against ASC investment, this exercise should be reevaluated periodically, especially if significant changes occur in the health care market. If the question of whether a health care system should invest in an ASC is actually a question of when, and not if, continuing to reassess the situation as circumstances evolve is prudent.

Conclusion

In the long run, shifting appropriate surgical cases to ASCs is likely to be advantageous for health care systems in an environment dominated by value-based care efforts.17,41 The decision to invest in a specific ASC, however, will be informed by the specific circumstances faced by the health care system making the decision. The fundamentals of good business will always hold true: in the future, the health care systems that can manage to deliver the highest quality surgical services, at the most reasonable prices, will be the ones most likely to thrive.

Acknowledgments

Dr. O’Neill was supported by the Veterans Affairs (VA) Office of Academic Affiliations through the Robert Wood Johnson Foundation Clinical Scholars Program and the University of California, Los Angeles, Gerald R. Levey Surgical Resident Research Award. This article does not represent the views of the U.S. Department of Veterans Affairs or the U.S. government.